Thanks to favorable economic conditions and historically low interest rates, real estate investing has boomed here in Canada. If you have invested in rental properties, or plan to in the near future, take in these three tax tips on how to make the most out of your real estate investment(s).
- Keep Proper Records
Keep proper documentation of any income or expenses coming from your rental property. Do not be tempted to mix these transactions with your personal bank account. It’s a common oversight which often leads to headaches for you, your accountant and the CRA around tax season. The CRA will expect proper filing in an organized fashion; and don’t be fooled into thinking just a bank transaction history will do.
- Buy and Hold – Don’t Sell Too Early
Be careful to not sell your rental property too quickly. The CRA may actually view any profit earned as business income. If that’s the case, you will have to pay taxes on your profit. It’s favorable to hold onto your property a long-term basis. If and when you decide to sell, it’s far more likely that the profit will be classified as capital gain, thus making one half of your gain safe from a tax hit.
- Consider Depreciation
Depreciation, or Capital Cost Allowance (CCA), can be a good way to protect your real estate income from taxes by transferring your obligation to future tax years. CCA works by amortizing a portion of the cost of your rental property against your rental income – roughly 4% of your building’s cost on a declining basis year by year. But note that selling your property may result in a recapture of your CCA. You would be forced to add this recaptured amount to your taxable income when preparing your tax return. Unlike capital gain, recapture is 100% taxable.
